1. Chapter 1 Introduction to Savings Personal Finance Mr. Brown

2. Savings 101

3. Saving Basics  Savings is the portion of current income not spent on consumption. Mainly used for long term and short term needs. Short Term Needs- immediate future of a year or less  Emergencies- Unemployment, sickness, accident, etc.  Social Events- weddings, family gatherings, vacations, etc.  Major Purchases- car, furniture, electronics, appliances, etc. Long Term Needs – future needs greater than a year and usually more costly 1. Home Ownership 2. Education 3. Retirement 4. Investing

4. How your money grows…  Principal- initial amount deposited into a savings account  Time (term)- amount of time money is invested (usually in years or months)  Interest (rate)- money a financial institution pays or charges Simple Interest = Principal x Rate x Time  APY- Annual Percentage Yield- Actual interest rate account pays per year with compounding included  Truth in Savings Act states APY must be disclosed so that consumers can easily compare products/rates offered between various lending institutions  Compounding Interest- bank pays $ on principal and previously earned interest  the more times compounded, the more money you make

5. The Power Of Compounding COMPOUNDING 5% ANNUALLY YEARBEGINNING BALANCEINTEREST EARNED %5ENDING BALANCE 1$100.00$5.00$105.00 2 $5.25$110.25 3$110.00$5.51$115.76 COMPOUNDING QUARTERLY (5% ÷ 4 =.0125) YEARBEGINNINGRATEQ1Q2Q3Q4END BAL 1100.01251.251.271.281.30105.20 2.01251.321.331.351.37110.57 3.01251.381.401.421.44116.21

6. The Power of Compounding ! Darryl opens an Individual Retirement Account (IRA) to start saving.  Here's an example: Two different individuals--Darryl and Cheryl, each 22 years old--have an extra $2,000 a year to invest or spend as they choose. Darryl opens an Individual Retirement Account (IRA) to start saving. Cheryl chooses to spend her $2,000. In this example, Darryl's IRA earns 12% per year. Darryl saves $2,000 per year for six years, then never puts another cent into his IRA. Cheryl spends her $2,000 per year for six years. After that time, she invests $2,000 per year until she is 65 years old. Cheryl earns the same 12% interest per year that Darryl does. CAREFULLY  Study the chart on the next slide CAREFULLY. What does it tell you?

7. What does this tell you?

8. The Power of Compounding !  The chart on the previous slide shows the value of Darryl's and Cheryl's respective IRAs, from the time they are 22 years old all the way to 65. Darryl's total investment is $12,000 ($2,000 /yr. for the first 6 yrs) Cheryl's total investment is $74,000 ($2,000/yr. for the last 37 yrs). * Source: http://www.mindyourfinances.com/money-management/savings/081104-04http://www.mindyourfinances.com/money-management/savings/081104-04= =

9. Financial Freedom is…  Financial independence – “the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities” –Wikipedia.com  How do I get There? 12 Steps to Financial Freedom G.O. Activity  located in Shared Drive

10. What!!!! You Don’t Believe Me?

11. Basic Savings Options  Savings Account – Account that lets one safely store money for future needs and goals (NO risk what so ever, but what is the current rate of inflation?) Pros Pros – Safe, Easy access (liquidity), Reliable Interest, short term savings needs Cons Cons - Fees and minimum balance vary, lower interest rates (currently below 1 %)  Checking Account – bank account mainly used for paying bills and accessing cash Pros – Pros – Safe, Easiest access (with checks or debit cards), Direct Deposit, record keeping accuracy Cons Cons - Fees vary, most not interest earning

12. Basic Savings Options –cont. for long term saving needs  Money market account- a combination savings-investment plan in which $ deposited is used to purchase safe, liquid securities or for long term saving needs Pros Pros – Higher Interest rate returns, great for long term goals Cons Cons - Variable interest rate- up and down with stock market, larger minimum balance requirement  Certificate of deposit (CD)- a deposit that earns a fixed interest rate for a specified term Pros Pros - higher interest rates, greater returns Cons Cons - Less liquid, (Maturity date- the date on which an investment becomes due for payment), Penalty for early withdrawal

13. When Selecting a Bank consider…  Liquidity - how quickly and conveniently you can access your cash any cost?  Safety- insurance (FDIC) Up to $250,000 (back to $100,000 in 2014)  Convenience Location, products/services offered, hours, ATM’s  Interest Earning Potential (APY) Shop around for best rates (will be small, but better than 0)  Fees and Restrictions Minimum balance, withdrawal/ATM fees, etc

14. Savings Tips  Save Regularly!  Set up a Direct Deposit relationship with your employer  Paycheck AUTOMATICALLY deposited into your bank account  Take out Automatic Payroll and Savings Deductions for LONG TERM Investing ◦ IRA (retirement) - tax deferred and Low Liquidity ◦ 401K ◦ College Savings (Tap-529) ◦ Investing Account (Stocks and Mutual Funds) ◦ Shop Wisely ◦ Buy Needs, NOT WANTS ◦ Use your Phone! (Get the APPS!)(Get the APPS!)

16. Get Researching!

17. Savings Tips  Save Regularly!  Set up a Direct Deposit relationship with your employer  Paycheck AUTOMATICALLY deposited into your bank account  Take out Automatic Payroll and Savings Deductions for LONG TERM Investing ◦ IRA (retirement) - tax deferred and Low Liquidity ◦ 401K ◦ College Savings (Tap-529) ◦ Investing Account (Stocks and Mutual Funds) ◦ Shop Wisely ◦ Buy Needs, NOT WANTS ◦ Use your Phone! (Get the APPS!)(Get the APPS!)

18. SAVINGINVESTING Savings vs. Investing Directions: Create a basic Venn diagram depicting the basic differences and similarities between saving and investing.